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How do you know if you really have a market opportunity?

#1

I feel like market opportunity is a fuzzy evaluation - it ties into the idea of ‘realistic optimists’ that we talk about at Startup Secrets, but what are your thoughts on how you evaluate the market opportunity?

Do you have certain metrics you measure by? Are they objective or subjective? Do you work on the ‘feel’ of your product and potential customers, or do you go by specific market value?

Let me know your thoughts!

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#2

OK – so this one, I think, has both a straightforward answer and a much more nuanced one.

The straightforward answer is: the market is what the market is. And every entrepreneur should have an idea of what that is: where are the customers, how many of them are there, how much might they be willing to spend on the product/service that the entrepreneur is offering, how much market penetration can the entrepreneur really achieve. Usually, this analysis is done both “top-down” and “bottoms up.”

The “top-down” approach is to look at the industry, the number of players, the competition, and assess/measure how much the startup might be able to capture.

The “bottoms up” approach is to look at individual customers and the value prop to those customers: how much can you sell into a single customer? For how much revenue? For how long? And how many of those particular types or groups of customers are there that the company can realistically sell to?

The best analyses combine the thinking of both to reach a “reasonable” sense of the target market as well as a path to attacking that market in digestible chunks (see our material on Minimum Viable Product and, more importantly, Minimum Viable Segment).

I think the more nuanced question is: how big is big enough? If I think it’s going to take $100+million to get my company off the ground (think, Tesla), then it had better be a pretty huge market. And I’d better be able to generate really healthy returns for my investors.

On the other hand, if the market is $5 million, or $10 million, or some other relative small number, does that mean it’s a bad opportunity? Not necessarily! It does mean that raising capital will be tough, because the math doesn’t work for the company to profit AND pay back investors a return they would think reasonable. But if you can bootstrap the business without outside capital, or with loans rather than equity, and you can model a business that generates a nice profit, what’s wrong with that?

If you can develop a business that generates a reasonable (to the entrepreneur) profit and delivers the lifestyle the entrepreneur wants, then what’s wrong with going after a small market?

So the bottom line when thinking about this question: what’s your goal? That has to come before you think too hard about whether a market is big enough or not – and it involves deep thought about your personal goals/objectives, how you’re going to finance the startup, and what kinds of returns you have to produce for investors (or bankers, in the form of principal and interest payments).

I’m happy to write more and discuss this more – let me know what questions I might answer!

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